Thinking about purchasing a luxurious condo in the bustling metropolis that is Toronto? First off, congratulations! Second, you’re probably wondering how to calculate the cost of ownership for such a purchase, including the dreaded down payment! Yes, buying a condo is quite similar to buying a house in most respects, including having the proper down payment on hand to secure a mortgage.
The question is, how much of a down payment will you actually need to secure your new condo? The answer isn’t quite as straightforward as we would like, which is why it’s good to take a moment and figure out the right way to calculate how much you’ll need for said down payment. That way, you can secure your condo without issues, while planning for a future inside of your new home.
HOW MUCH DOWN PAYMENT WILL YOU PAY FOR CONDO?
While the amount of a down payment always depends on the final cost of the condo in question, the percentages are considered standard.
Condos ranging $500,000 and under are subject to a down payment equal to 5% of the total purchase price, whereas condos priced $500,000-$900,000 require 10%.
Most of today’s Toronto-area condos fall into the latter range, but some are in excess of $1 million. Due to the higher lending risk associated with properties of this price range, a 20% down payment is required in order to secure a mortgage.
Before buying your condo, you can use the above values to calculate a close estimate of your initial down payment. This is a great way to factor in existing living expenses and debts as you prepare for the big move.
UNDERSTANDING HOW DOWN PAYMENTS WORK
Before calculating anything, always take time to remember what a down payment is, and what it is intended for. A down payment is merely a percentage of the total condo sale amount, which is paid upfront. The remaining bulk is then processed and paid through a traditional mortgage loan. It’s not like buying a car, where you can sometimes get away without having to put any upfront money down. Buying a house or condo is a large undertaking, which is why down payments are necessary. Not only do they signal a willingness and commitment to buy a condo, but they also show lenders that buyers are financially responsible.
Given the current volatility of the economy in 2023, flexibility is key to maintaining a healthy and robust real estate market. Therefore, some lenders do offer the option of no down payment, in order to make things easier on prospective home buyers. Another option for first-time home buyers is the Canadian FHSA (First Home Savings Account) option, offered by several banks including RBC Royal Bank, and National Bank of Canada. This tax-free option allows individuals between the ages of 18-71 to build up a lifetime limit of $40,000 with an annual $8,000 contribution limit for up to 15 years, or until the individual turns 71, or makes their first qualifying withdrawal. The FHSA option is open specifically to Canada residents who are looking to purchase their first home.
However, if you intend to go the traditional route, then certain factors such as poor credit, or self-employed status may prompt a higher necessary down payment in order to secure the loan. While you may be totally confident in your ability to handle a mortgage, lenders have no such guarantee. It’s good to keep this in mind before pursuing a condo purchase.
HIGH VS. LOW DOWN PAYMENTS
While you may be tempted to put down the bare minimum percentage based on the values listed above, it may prove counterproductive over time. Like any purchase of this type, the amount you lay down at the start can have significant effects on future payments. For instance, putting down the minimum 5% on a condo priced at $650,000 may seem like a great way to get started, but you will end up paying more overall throughout the course of your mortgage. A good rule of thumb is to analyze the maximum amount you’re able to put forth as a down payment, which will in turn lower your mortgage payments and interest charges.
UTILIZING HOME BUYERS’ PLANS
Buying a condo in Toronto can be challenging, but there are several options available to make the process easier. One of the best methods is to utilize the home buyers’ plan (HBP), which allows you to withdraw up to $25,000 of cash from your Registered Retirement Savings Plan (RRSP). You then have 15 years to repay that money back into your RRSP without penalties.
Take heed, however. Failure to make timely repayments could lead to shock during tax season, as well as missed growth within your RRSPs. However, if you’re confident you can keep up with the repayments, this is an excellent way to put forth money on a down payment without having to pinch every penny in the process.
GOOD DOWN PAYMENT PRACTICES
Naturally, you’ll want to amass a down payment that won’t conflict with your daily life, or lead to financial problems. The good news is that if you’re able to gather up cash in such large amounts, you probably know a thing or two about how to budget. If you haven’t yet started on your down payment, now’s the time to analyze your current living standards and determine where you can trim the excess. That way, you’ll achieve your goal far quicker. Monthly expenses that you can do without should be purged temporarily. After all, a penny saved is a penny earned.
Another good practice is to wait a bit longer before pursuing the purchase of your condo. While it may be tempting to sign on the dotted line for that picturesque dream condo with the dynamite view, you might do yourself a favor by holding off. The good news is that Toronto is a big city with plenty of condos to choose from, and just because you didn’t score the first one you had your eye on does not mean you won’t find another of equal, or greater beauty. The more money you save for a down payment means less long-term overall costs, and that’s a smart financial strategy for everyone.
And finally, consider wiping out your existing credit card and/or ancillary debts before going to work on your down payment. That way, you’ll be free and clear from any financial hurdles lurking in the background, and your ability to focus on the down payment will be much easier. It’ll also impress lenders a lot more if they know that you’ve taken steps to achieve financial responsibility.
CONCLUSION
There are always options when it comes to handling down payments on a new condo, and if you’re still not sure how best to approach the situation, give us a call. Fine Homes Real Estate knows the ins and outs of the condo market better than anyone in the Toronto area, and we know exactly how to proceed with your down payment. We’ll also help you pick the condo of your dreams from some of the best on the market, so don’t hesitate! We’re on standby to assist, so you can start the next chapter of your life in a beautiful new home.
